Trump’s stock-market mistake

When stocks go up, President Trump takes credit for it. So what does he do when stocks tank?

Nothing, yet. Trump hasn’t weighed in since a big selloff began at the end of January, lopping nearly 8% off the S&P 500 (^GSPC) since January 26, and culminating in the biggest-ever one-day point drop in the Dow Jones Industrial Average (^DJI).

Presidents ordinarily stay mum on the markets, more or less, so Trump’s silence amid the carnage wouldn’t be unusual—except that he’s a frequent stock-market commentator. Trump has tweeted about the rising stock market at least 47 times since Election Day in 2016, often taking credit for the gains.

January 20, 2018: “Unprecedented success for our Country, in so many ways, since the Election. Record Stock Market….”

You get the idea: When stocks go up, it’s because Trump’s policies are good for business. And stocks have mostly gone up since Trump’s election in 2016.

But if Trump gets the credit for rising stocks, he must also get the blame for falling stocks. And this February market meltdown, which is probably temporary, foreshadows the kind of trouble Trump is likely to face later in his term when the markets and perhaps the broader economy are much more likely to run out of gas.

The Dow was looking good for a while. And then it tanked.

In reality, presidents get both too much credit and too much blame for what happens in markets and the economy. The business cycle is generally independent of political calendars, with the economy expanding and contracting on account of many complex factors that are largely beyond political control. The Federal Reserve probably has more influence over the economy than any president, and the best the Fed can ever hope to do is moderate the extremes of the business cycle.

Trump deserves some credit. The tax cuts he pushed hard for and signed at the end of 2017 will swell profits at many U.S. companies, which probably goosed stocks throughout 2017 as investors anticipated them, and at the beginning of 2018 as the cuts actually went into effect. Trump also champions deregulation, which will make it easier for some companies to do business.

At the same time, Trump may be learning the risks of interfering with markets, even if it’s to boost them. The February selloff reflects concerns about rising interest rates, which might be due to those very same Trump tax cuts. This is an indirect connection, and there are other factors, but there’s a risk the tax cuts could stoke inflation, forcing the Federal Reserve to tighten monetary policy faster than expected. That would be unfavorable for profits and stocks. The tax cuts will also reduce federal revenue, forcing Uncle Sam to borrow more, and that extra debt could be unnerving investors, too.

A television screen on the floor of the New York Stock Exchange headlines the stock index news at the close of trading, Monday, Feb. 5, 2018. (AP Photo/Richard Drew)

When stock prices were rising, Trump claimed ownership of the stock market. That means he owns the wipeouts as well–especially since there’s nothing else going on, like a war or far-flung economic collapse that might be an obvious cause.

Trump will probably luck out, for the time being. Economists generally agree that business and consumer fundamentals are strong, with no giant problems lurking the way they were at the onset of the 2008 financial crash. A modest market correction might even alleviate worries about overvalued stocks that only seem to go up.

But Trump probably won’t get that lucky four years in a row. The tax cuts are front-loaded, with most of the stimulus effect likely in 2018 and perhaps 2019. After that, a hangover could come. Mark Zandi of Moody’s Analytics recently told Yahoo Finance the next recession could hit in 2020—right as Trump is campaigning for reelection.

Trump, of course, will probably find others to blame if the markets do turn south—the Democrats, the Mueller “witch hunt,” “fake news,” maybe even NFL protesters or illegal immigrants. The question is whether voters will believe the deflections, or hold Trump fully accountable. Like markets, voters can be unforgiving.